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Equity Funds Rose Nearly 9% in ‘Q4; They Declined 6%, Though, in 2011

The last few months of 2011 entailed sovereign-debt issues in Europe, partisan gridlock and other tough scenarios, but the average equity fund still improved 8.73 percent in fourth quarter, according to Lipper. Unfortunately, these funds ended the year down 6 percent.

“Despite a strong ‘Q3 earnings reporting season, with 70 percent of the S&P 500 constituents reporting earnings above analyst expectations, investors remained rattled by the on-again/off-again resolutions of European authorities and the relatively high U.S. unemployment rate,” said Tom Roseen, head of research services for Lipper in Denver, in his latest performance report, which was released in early January.

Though equity funds ended 2011 with negative results for the full year, the Dow Jones Industrial Average was able to post a 5.53 percent return, Roseen notes, after a good fourth quarter. “However, with lowered government spending in the cards, corporations sitting on a pile of cash, continued accommodations by the Fed, and advances in technology, investors had a reason to cheer toward year-end,” he explained.

According to Lipper’s preliminary fund-flows data, equity mutual-fund investors were net redeemers last year, pulling out an estimated $74.0 billion from the conventional funds business (excluding ETFs). It’s worth noting, though, that with the flight to safety of the last six months of 2011, investors injected $128.6 billion into taxable fixed-income funds for the year while redeeming a net $17.4 billion from the muni-bond fund group and $145.3 billion from money-market funds.

The equity-funds universe suffered downside performance in seven of the last eight months of 2011; only posting a plus-side return of 11.32 percent in October, Roseen shares. In November, the average equity fund slumped 1.32 percent and then handed back 0.88 percent for December.

The notable laggards for the quarter included precious-metals funds, which declined 5.71 percent, as gold lost 3.37 percent to end the quarter at $1,565.80 an ounce. Nonetheless, gold was still in positive territory for the one-year period, with a gain of 10.18 percent for 2011.

Fund Categories

For the first quarter in three, the U.S. diversified-equity funds macro-classification (which rose 10.77 percent in the final quarter of 2011) was the best performing of Lipper ’s four broad-equity macro-classifications. The group was helped by equity-leverage funds (16.92 percent) and small-cap value funds (15.65 percent).

According to Lipper, value-oriented funds (13.14 percent) outperformed the other styles for the first quarter in eight, and for the first quarter in four, small-cap funds (14.60 percent) outpaced the other capitalization groups. Mid-cap funds (11.69 percent) and large-cap funds (10.66 percent) outpaced their multi-cap counterparts (10.36 percent).

With investors’ preference for dividend-paying issues and defensive stocks in December, equity-income funds moved up 1.51 percent) for the month, nearly 12 percent for the quarter and 2.85 percent for 2011.

World-equity funds lagged the other three macro-groups for the month (-2.49 percent), the quarter (+4.47 percent), and the year (-14.06 percent), says Roseen: “Rising oil prices as a result of Middle East and African political revolts; devastation from Japan’s major earthquake, tsunami, and subsequent nuclear disaster; and China’s slowing growth led to investor consternation, and investors generally fled from riskier assets.”

In the fourth quarter, though, investors bid up global-focused and large-cap issues, so that global large-cap core funds gained 7.76 percent for the last three months of the year and global large-cap value funds rose 7.56 percent.

Mixed-Equity Funds

In the fourth quarter, the mixed-equity funds macro-group improved 5.65 percent; this group comprises primarily life-cycle or target-date and target-allocation funds. Over the past few years, this group was the largest attractor of investor assets in the equity universe, Lipper says.

Through Nov. 30, 2011, the macro-group gained $58.6 billion in assets, more than doubling the inflows of the world-equity funds group. Quarterly returns for mixed-equity funds ranged from 0.73 percent for absolute-return funds to 8.68 percent for mixed-asset target 2045. The macro-group, though, suffered a one-year decline of 1.34 percent.

Recent Flows

Investors ended 2011 by taking more defensive positions, especially in bonds, a strategy that some analysts at EPFR Global expect should continue this year. In the final week of December, EPFR Global says, U.S. equity and bond funds (including ETFs) attracted “the bulk of what fresh money was committed,” totaling about $2.4 billion. Fund groups associated with Europe, the emerging markets and other riskier asset classes extended the outflow streaks that, in some cases, stretched back to the second quarter of 2011.

Equity funds (including ETFs) tracked by the Boston–based research group took in a total of $412 million for the week ending Dec. 28, while bond funds drew $1.98 billion. For the full year, U.S. bond funds had net inflows of $62.3 billion in 2011 vs. $171.6 billion in 2010. They attracted about $9.04 billion in assets in the final quarter of last year. Globally, bond-fund flows were $6.3 billion in the fourth quarter and $110.7 billion in 2011 vs. $354.3 billion in 2010.

Overall, says EPFR, “the pendulum swung with often dizzying speed between risk aversion and hunger for yield” in 2011. The two constants, the group notes, were “aversion to European bonds and appetite for debt carrying an implicit or explicit guarantee from the U.S. government, with Europe bond funds posting record-setting outflows while mortgage-backed bond funds enjoyed record inflows.”

High-yield bonds and municipal bond funds saw about 20 weeks of outflows in early 2011, but then ended the year with more than 15 weeks of inflows. Flows into U.S. bond funds, for instance, were spurred on by events in Europe, which “triggered a flight to safety.” Investors also recovered their appetite for municipal debt and put over $14 billion into this fund group during the final four months of the year.

High-quality bonds in 2011 posted their strongest returns since 2002, with last year’s performance even better than in 2008 when Treasury prices soared in response to the financial crisis, according to Anthony Valeri, LPL Financial’s market strategist.

“The main difference in 2011 was the better performance of investment-grade corporate bonds, which increased in price compared to notable price declines in 2008,” Valeri said. “Make no doubt about it, however, Treasuries stole the show in 2011 and led performance with price strength evident by the 1.4 percent decline in the 10-year Treasury yield, from 3.3 percent to 1.9 percent.”

Emerging-market bond funds had a mixed year, while European bond funds “suffered net redemptions [in] 46 of the year’s 52 weeks and broke their previous full year outflow record set in 2008,” with about $30 billion in net outflows in 2011, notes EPFR.

Other Investments

As for equity funds, U.S.-focused funds took in $3.7 billion in the fourth quarter. For the year, though, they had net outflows of $76 billion — up from outflows of $49 billion in 2010.

Equity funds concentrated in emerging-market investments had outflows of $7 billion in the final quarter of 2011. For all of 2011, they lost $47 billion–after attracting nearly $96 billion in 2010.

The developed economies overall saw their equity funds lose about $2.6 billion in fourth quarter. The full-year flows were negative $31.4 billion vs. inflows of nearly $9 billion in 2010.

Money-market funds had inflows of close the $40 billion in final quarter of 2011, though they had outflows of nearly $110 million for all 12 months of last year. (They lost $500 million in 2010.)

Gold and precious-metals funds had outflows $1.6 billion in the fourth quarter, though they had total inflows of $8.1 billion for the year. That was down about 50 percent from previous year’s $16 billion.

Utilities-sector funds experienced inflows of close to $260 million in Q4’11 and almost $4 billion in 2011 vs. outflows of $1.3 billion in 2010. “During the final week of December, utilities-sector funds were “the only group to post inflows, capping a year that saw these funds take in 272 percent of the previous inflow record set in 2006,” according to EPFR. The Dow Jones Utility Average ended 2011 up 14.74 percent in 2011, its best yearly performance since 2007 and a strong showing vs. the Dow Jones Industrial Average, which rose 5.53 percent last year. •